Firms traditionally have issued conventional securities such as straight debt and common stock in order to raise capital. In general, straight debt securities (e.g., bonds, notes, loans, mortgages) raise capital by borrowing and promising to repay a principal amount and interest on a specified future date. Common stock securities, on the other hand, raise capital by selling an equity interest in the firm. Owners of common stock typically receive voting rights regarding firm matters and may benefit through appreciation of the stock value and/or receiving dividends.
In addition to conventional types of securities, firms also have a variety of more sophisticated hybrid investment instruments at their disposal. These hybrid securities often may have attributes of several different types of securities (e.g., debt components and equity components) and may change optionally or automatically at certain points in time or depending on market conditions. Convertible securities, such as convertible debt, for instance, provide the issuer and/or the holder with the option of exchanging the convertible securities for other related securities, such as common stock. Convertible securities may be attractive to investors due to the mix of features, for example, earning interest like bonds when the stock price is down or flat and increasing in value like common stock when the stock price rises.
Mandatory convertible securities are another type of hybrid, which as the name implies, automatically convert into common stock on a specified future date. Mandatory convertible securities can have a variety of payoff structures that determine the number of shares of common stock provided to the holder. Typically, the number of shares will depend on the market price of the stock on the conversion date relative to certain threshold prices and limits on appreciation.
Unit structures are another relatively recent type of hybrid, which include a forward contract and security component, such as a note. Generally, the forward contract is a purchase contract requiring the holder to buy a quantity of common stock from an issuer for a given price on or before a certain settlement date. The note secures performance of the investor's obligations under the forward contract on the settlement date (e.g. the note is pledged as collateral) and the note matures at a point in time later than the forward contract settlement date. On the settlement date, the investor pays the settlement price and receives a quantity of common stock according to a payoff function. Again, the number of shares provided to the holder may depend on the market price of the stock on the conversion date relative to certain threshold prices and limits on appreciation.
In unit structures, the remaining term of the note beyond the settlement date, in many cases, may be two years or even longer. As such, the investor may attempt to remarket the debt to new investors. If remarketing to a new investor is successful, the proceeds from the sale can be used to satisfy the purchase price of the forward contract.
Unit structured mandatory convertible securities of the type described above may or may not be designed so that the interest payments on the fixed income security portion of the unit are tax deductible. To achieve tax-deductibility, the fixed income security is generally designed to mature at least two years after the settlement of the forward purchase contract. This separation is necessary because tax rules generally disallow deductions for debt that is repaid at maturity in equity and will even integrate separate transactions that occur roughly contemporaneously if the combined transactions would effectively have the economic effect of repaying debt with equity. If the forward contract and the fixed income security matured at or near the same point in time, the two components might be integrated for tax purposes. This possibility arises because the amount the holder is obligated by the forward purchase contract to pay the issuer (in exchange for common stock) typically matches the amount the issuer is obligated by the fixed income security to repay the holder. As a result, the economic effect is that debt (the fixed income security) has been repaid with equity since the payments on the forward purchase contract and the fixed income security offset each other and the holder is left with common stock. The two-year difference in settlement and maturity dates prevents this integration since the settlement and maturity no longer occur contemporaneously and the economic effect is different (for instance, the issuer of the fixed income security still owes the holder its full principal amount regardless of the settlement of the forward purchase contract).
Accordingly, remarketing certain securities has significant financial implications for issuers and/or investors. Therefore, systems and methods for optimizing the remarketing of securities are needed.